Economic and Stock Market Commentary for the week of September 12, 2017

The economy is giving off mixed signals, with moderating employment gains, low wage growth, and slumping car sales countered by strengthening levels of manufacturing and non-manufacturing. Specifically, just 156,000 jobs were added in August, while there were downward revisions in job growth for June and July. Also, average hourly wages rose just $0.03 last month, down from $0.09 in July. Auto industry sales continue to slump after a long climb, and post-hurricane replacement demand would only be temporary. Conversely, manufacturing reached its highest level in six years in August, aided by increases in production and employment, while non-manufacturing activity continued to gain ground in most categories.

We think growth can hold near second-quarter levels in the current half. Still, that may be more of a struggle than we thought earlier, reflecting the severe damage from Hurricane Harvey, which will hurt growth before rebuilding kicks in. That said, the better tone on the industrial front, resilient demand for housing, and high levels of consumer confidence should gradually boost job creation, keeping GDP growth near the second quarter’s 3.0%.

There is a bright side to modest, but steady, growth, namely that the Federal Reserve may delay raising interest rates until 2018. However, the employment situation is fluid. So a shift in momentum later this year is possible, and that could change the rate outlook.

The expansion’s sustainability isn’t likely in question. In fact, most indicators suggest this long up cycle retains the requisite staying power on the industrial and consumer fronts—from a cooperative Fed and from possible passage of business-friendly tax legislation and infrastructure programs—to keep going through decade’s end.

Investor sentiment is up and down these days. For the longest time, it had been the best of all worlds for Wall Street, with a resilient economy, solid earnings, and a supportive Fed keeping sentiment strong. Now, lawmakers must secure agreement on some politically charged economic issues, including tax reform, while also having to deal with increasing geopolitical tensions—particularly from North Korea. So market volatility is understandably up.

Conclusion: The outlook remains rather upbeat. But investors are paying for this prospect with extended P/E ratios and, therefore, elevated risk.

Source: Valueline.com